LONDON - Gold's appeal as it draws support from the widening conflict in the Middle East is expected to remain intact even if some investors have favoured the dollar as their preferred safe haven, traders and analysts said.

They added that a sharp fall in gold prices on Tuesday was likely to draw in buyers.

A flight to safety lifted the dollar index  =USD  by 0.5% on Tuesday, taking it to a more than three-month peak, as traders reassessed prospects for interest-rate cuts by global central banks - particularly in oil-importing countries that face a renewed surge in energy prices.

DOLLAR STRENGTH PUSHES GOLD LOWER

Gold, typically viewed as a safe haven during periods of uncertainty and a long-term hedge against inflation, struggled under the weight of dollar strength. The dollar's jump pushed spot gold to its lowest since February  20, down 4% at $5,136.

"This is one of those days when, if you've got profits, you have just take the risk off the board wherever you can," said Robert Gottlieb, former head of precious metals at Koch Supply and Trading.

"But have the fundamentals changed? The answer is no. We still have persistent geopolitical and economic uncertainty."

Traders have been made cautious following extreme volatility on January 29 when gold hit a record high of $5,594.82 then plunged over the next two sessions.

"People learned on January  30 to be careful - to decide whether it's a dip or a falling knife, and not get caught," Gottlieb said.

INCREASED GOLD PRICE FORECAST

BNP Paribas raised its average 2026 gold price forecast by 27% to $5 620 – with a peak above $6 250 likely by end-2026 - this week.

Gold's fall to around the $5 100 level will attract demand from Asia as safe-haven buying continues, a precious metals trader said. He asked not to be named as he was not authorised to speak to media.

He added that the selloff on the gold market this week had been greater because of the amount of buying on Friday - ahead of the start on Saturday of the US-Israeli air war against Iran.

Buying culminated when gold prices closed on Monday at $5,260, their highest level since January 30, and then profit-taking ensued.

A selloff in government bonds and stocks, with the S&P 500 index .SPX last down 1.5%, added to the pressure on gold as sharp equity corrections often force investors to liquidate safe-haven holdings, including bullion, to release cash for deposits with brokers.

"Traders who have been long gold since any time before New Year could use those gains to take profit in the face of margin calls in equities," said Adrian Ash, head of research at online marketplace BullionVault.

Gold prices surged 64% last year, helped in part by investors' cash inflows into bullion as they grew uneasy about the S&P 500's 2025 strong gains.

"Day-to-day, their performance is a coin toss - month on month too. But if you think this war, God forbid, is going to drag on, then gold's long-term appeal as a safe haven is hard to beat," Ash added.

On a 12-month horizon, gold tends to rise when stocks have fallen from a year earlier. Over a five-year horizon since 1970, according to Ash's calculations, gold has always been higher than five years before when the S&P 500 price index has declined over that period.